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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In management's opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended November 30, 2007 on file with the SEC.
There have been no material changes in our significant accounting policies, except for the adoption of the Financial Accounting Standards Board ("FASB") Financial Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109", on December 1, 2007 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended November 30, 2007.Reclassification
Certain prior year amounts have been reclassified to conform to current year presentation in the condensed consolidated balance sheets. Specifically, there was a reclassification totaling $35.0 million from purchased intangibles to long-term and short-term other assets. See Notes 3 and 4 for additional information regarding this reclassification.Recent Accounting Pronouncements
With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended August 29, 2008, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended November 30, 2007, that are of significance, or potential significance, to us.
In September 2008, the FASB issued FASB Staff Position ("FSP") No. 133-1 and FIN 45-4 ("FSP FAS 133-1 and FIN 45-4"), "Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161". FSP FAS 133-1 and FIN 45-4 amends FASB Statement No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. FSP FAS 133-1 and FIN 45-4 also amend FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others", to require additional disclosure about the current status of the payment/performance risk of a guarantee. The provisions of the FSP that amend SFAS 133 and FIN 45 are effective for reporting periods ending after November 15, 2008. FSP FAS 133-1 and FIN 45-4 also clarifies the effective date in FASB Statement No. 161 ("SFAS 161"), "Disclosures about Derivative Instruments and Hedging Activities". Disclosures required by SFAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Because FSP FAS 133-1 and FIN 45-4 only require additional disclosures, the adoption will not impact our consolidated financial position, results of operations or cash flows.
In April 2008, the FASB issued FSP No. 142-3 ("FSP 142-3"), "Determination of the Useful Life of Intangible Assets". FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, "Goodwill and Other Intangible Assets". This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. Since this guidance will be applied prospectively, on adoption, there will be no impact to our current consolidated financial statements.
In March 2008, the FASB issued SFAS 161 which requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133, and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Because SFAS 161 only requires additional disclosure, the adoption will not impact our consolidated financial position, results of operations or cash flows.
In June 2007, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 07-1 ("SOP 07-1"), "Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies". SOP 07-1 defines investment companies for purposes of applying the related AICPA Audit and Accounting Guide. SOP 07-1 provides guidance on whether an investment company's parent or equity-method investor should retain investment-company accounting in its financial statements. SOP 07-1 would have been effective beginning in the first quarter of fiscal 2009; however, in February 2008, the FASB issued FSP SOP 07-1-1 which indefinitely delayed the effective date of SOP 07-1.
In February 2007, the FASB issued FASB Statement No. 159 ("SFAS 159"), "The Fair Value Option for Financial Assets and Financial Liabilities". Under SFAS 159, companies may elect to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings and disclosed. SFAS 159 was effective for us beginning in the first quarter of fiscal 2008. We currently do not have any instruments for which we have elected the fair value option under SFAS 159. Therefore, the adoption of SFAS 159 has not impacted our consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued FASB Statement No. 157 ("SFAS 157"), "Fair Value Measurements", which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. Effective December 1, 2007, we adopted SFAS 157 for financial assets and liabilities recognized at fair value on a recurring basis. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our consolidated financial position, results of operations or cash flows. See Note 2 for information and related disclosures regarding our fair value measurements.
In July 2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Additionally, in May 2007, the FASB published FSP No. FIN 48-1 ("FSP FIN 48-1"), "Definition of Settlement in FASB Interpretation No. 48". FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. We adopted both FIN 48 and FSP FIN 48-1 on December 1, 2007. The adoption of FIN 48 and FSP FIN 48-1 resulted in an increase to both assets and liabilities in our condensed consolidated balance sheet as of the beginning of fiscal 2008. See Note 6 for additional information regarding income taxes, including the effects of adoption of FIN 48 and FSP FIN 48-1 on our condensed consolidated financial statements.
NOTE 2. FINANCIAL INSTRUMENTS We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, available-for-sale fixed income and equity securities, other equity securities and foreign currency derivatives. The fair value of these financial assets and liabilities was determined using the following inputs at August 29, 2008:
Fixed income available-for-sale securities include United States treasury securities (81% of total), corporate bonds (4% of total) and obligations of foreign governments and their agencies (15% of total).
The investments of limited partnership relate to our interest in Adobe Ventures IV L.P. ("Adobe Ventures") which was $37.9 million and $30.6 million as of August 29, 2008 and November 30, 2007, respectively. The level 1 investments of limited partnership relate to investments in publicly-traded companies and the level 3 investments relate to investments in privately-held companies. Our estimation of fair value for our level 3 investments includes, but is not limited to, reviewing each company's cash position, financing needs, earnings and revenue outlook, operational performance, management and ownership changes and competition. The change in this asset balance relates primarily to investment gains included in earnings during the three and nine months ended August 29, 2008. All other activity during the quarter was insignificant both individually and in the aggregate. See Note 4 for further information regarding Adobe Ventures and related accounting policies.
Foreign currency derivatives include option and forward foreign exchange contracts primarily for the Japanese Yen and the Euro.93932900093932900090299600090299600071630007163000379340005030003743100022639000226390001910061000946995000925635000374310001124000112400011240001124000NOTE 3. GOODWILL AND PURCHASED AND OTHER INTANGIBLES Goodwill as of August 29, 2008 and November 30, 2007 was $2.134 billion and $2.148 billion, respectively. The change includes net reductions in goodwill of $9.6 million related to deferred tax assets associated with our acquisition of Scene7 and $4.2 million related to the tax reserve associated with the acquisition of Macromedia, offset in part by foreign currency changes.Certain amounts as of November 30, 2007 have been reclassified to conform to current year presentation in the condensed consolidated balance sheets. Specifically, we reclassified $55.5 million of cost and $20.5 million of accumulated amortization ($35.0 million, net) from purchased intangibles to long-term and short-term other assets associated with certain technology license arrangements.
Purchased and other intangible assets subject to amortization were as follows as of August 29, 2008:
Purchased and other intangible assets subject to amortization were as follows as of November 30, 2007:
Amortization expense related to purchased and other intangible assets was $43.2 million and $140.7 million for the three and nine months ended August 29, 2008, respectively. Comparatively, amortization expense was $60.5 million and $157.7 million for the three and nine months ended August 31, 2007, respectively. Of these amounts, $26.2 million and $89.5 million were included in cost of sales for the three and nine months ended August 29, 2008, respectively, and $42.6 million and $104.6 million were included in cost of sales for the three and nine months August 31, 2007, respectively.
Purchased and other intangible assets are amortized over their estimated useful lives of 1 to 13 years. As of August 29, 2008, we expect amortization expense in future periods as follows:411408000409110000183420004585400013092500013122500019722000019722000080000080000034728700037509900075869500078420900031663700025072100065360002767600071709000524430001170220008552900039000019600019565700016584400051229400041656500094771000158389000118060001817800059216000787820008019800011169100041000060400015163000020925500022133000563280008244000467900033870000947710002128200067633000486110001191700010090001178000151630000NOTE 4. OTHER ASSETS
Other assets consisted of the following as of August 29, 2008 and November 30, 2007:
Acquired rights to use technology includes $100.0 million associated with certain technology licensing arrangements entered into during the third quarter of fiscal 2008. An estimated $56.0 million of this cost is related to future licensing rights and has been capitalized and will be amortized on a straight-line basis over the estimated useful lives up to nine years. Of the remaining costs, we estimated that approximately $27.2 million was related to historical use of licensing rights which was expensed as cost of sales, and the residual of $16.8 million was expensed as general and administrative costs. In connection with these licensing arrangements, we have the ability to acquire additional rights to use technology in the future. See Note 13 for further information regarding our contractual commitments.
In general, acquired rights to use technology are amortized over their estimated useful lives of 3 to 15 years. Certain prior year amounts have been reclassified to conform to current year presentation in the condensed consolidated balance sheets. Specifically, there was a reclassification associated with certain technology licensing arrangements totaling $35.0 million, net from purchased intangibles of which $28.7 million and $4.7 million were reclassified to acquired rights to use technology and long-term prepaid royalties, respectively. The remaining amount was reclassified to short-term prepaid royalty.
Included in investments is our limited partnership interest in Adobe Ventures which is consolidated in accordance with FASB Interpretation No. 46R, a revision to FASB Interpretation No. 46, "Consolidation of Variable Interest Entities". The partnership is controlled by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures. Investments also included our direct investments which were accounted for under the cost method.
The increase in security and other deposits relates primarily to the purchase of real property in Massachusetts. We entered into a Purchase and Sale Agreement, effective May 12, 2008, for the acquisition of real property located in Waltham, Massachusetts. We will purchase the property subject to completion of construction of an office building shell and core, parking structure and site improvements. The purchase price for the property will be $44.7 million. We made an initial deposit of $7.0 million to be held in escrow until closing and then applied to the purchase price. Closing is expected to occur in May 2009 and the remaining balance is due at such time. 935270004164200070469000528300001547800066500001221600067480009209000314500073640007367000319500032240003065000428500023640002194000NOTE 5. TRADE AND OTHER PAYABLES AND ACCRUED EXPENSES
Trade and other payables consisted of the following as of August 29, 2008 and November 30, 2007:
Accrued expenses consisted of the following as of August 29, 2008 and November 30, 2007:
Other primarily includes general corporate accruals for corporate marketing programs, local and regional expenses, charitable contributions and technical support. Other is also comprised of deferred rent related to office locations with rent escalations, accrued royalties, foreign currency derivatives and accrued interest on the credit facility.381500004172400018104000251430001731990002050180002370700021231000159502000157187000NOTE 6. INCOME TAXES
We adopted both FIN 48 and FSP FIN 48-1 on December 1, 2007. The adoption of FIN 48 resulted in an increase of $3.9 million to both assets and liabilities in our condensed consolidated balance sheet as of the beginning of fiscal 2008. Upon adoption, the gross liability for unrecognized tax benefits at December 1, 2007 was $218.4 million, exclusive of interest and penalties. The total amount of gross FIN 48 liabilities includes $57.7 million that relates to certain tax attributes from acquired companies, including Macromedia. These liabilities from acquired companies are not recorded on our balance sheet because they are related to positions that have not yet been claimed on our income tax returns. If the total FIN 48 gross liability for unrecognized tax benefits at December 1, 2007 were recognized in the future, the following amounts, net of an estimated $22.2 million benefit related to deducting such payments on future tax returns, would result: $99.0 million of unrecognized tax benefits would decrease the effective tax rate, $82.8 million would decrease goodwill and $14.4 million would increase additional paid-in-capital.
We have historically presented our estimated liability for unrecognized tax benefits as a current liability. FIN 48 requires liabilities for unrecognized tax benefits to be classified based on whether a payment is expected to be made within the next 12 months. That is, amounts expected to be paid within the next 12 months are to be classified as a current liability and all other amounts are to be classified as a non-current liability. As a result of adopting FIN 48 in the first quarter of fiscal 2008, we reclassified $197.7 million from current income taxes payable to long-term income taxes payable, including accrued interest on the balance.
We have historically presented our estimated state, local and interest liabilities net of the estimated benefit we expect to receive from deducting such payments on future tax returns (i.e., on a "net" basis). FIN 48 requires this estimated benefit to be classified as a deferred tax asset instead of a reduction of the overall liability (i.e., on a "gross" basis). Thus, we recognized additional deferred income tax assets of $3.9 million to present the unrecognized tax benefits as gross amounts on our condensed consolidated balance sheet.
Our policy to classify interest and penalties on unrecognized tax benefits as income tax expense did not change upon the adoption of FIN 48. As of December 1, 2007, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $42.8 million.
We file income tax returns in the U.S. on a federal basis and in many U.S. state and foreign jurisdictions. We are subject to the continual examination of our income tax returns by the Internal Revenue Service ("IRS") and other domestic and foreign tax authorities. Our major tax jurisdictions are the U.S., Ireland and California. For California, Ireland and the U.S., the earliest fiscal years open for examination are 2001, 2002 and 2005, respectively.
During the nine months ended August 29, 2008, the gross liability for unrecognized tax benefits significantly changed from the balance at November, 30, 2007. In August 2008, a U.S. income tax examination covering our fiscal years 2001 through 2004 was completed. Our accrued tax and interest related to these years was $100.0 million and was previously reported in long-term income taxes payable. In conjunction with this resolution, we requested and received approval from the IRS to repatriate certain foreign earnings in a tax-free manner, which resulted in a reduction of our long-term deferred income tax liability of $57.8 million. Together, these liabilities on our balance sheet decreased by $157.8 million. Also in August 2008, we paid $80.0 million in conjunction with the aforementioned resolution, credited additional paid-in-capital for $41.3 million due to our use of certain tax attributes related to stock option deductions, including a portion of certain deferred tax assets not recorded in our financial statements pursuant to SFAS 123R, and made other individually immaterial adjustments to our tax balances totaling $15.8 million. A net income statement tax benefit in the third quarter of fiscal 2008 of $20.7 million resulted. All other movements in the deferred tax asset and liability accounts are the result of our normal 2008 tax provision.
The gross liability for unrecognized tax benefits at August 29, 2008 was $155.8 million, exclusive of interest and penalties. If the total FIN 48 gross liability for unrecognized tax benefits at August 29, 2008 were recognized in the future, the following amounts, net of an estimated $18.1 million benefit related to deducting such payments on future tax returns, would result: $54.7 million of unrecognized tax benefits would decrease the effective tax rate and $83.0 million would decrease goodwill.
As of August 29, 2008, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $14.3 million.
The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues in the IRS and other examinations could be resolved within the next 12 months, based upon the current facts and circumstances, we cannot estimate the timing of such resolution or range of potential changes as it relates to the unrecognized tax benefits that are recorded as part of our financial statements.NOTE 7. STOCK-BASED COMPENSATION
The assumptions used to value option grants, restricted stock units and performance shares during the three and nine months ended August 29, 2008 and August 31, 2007 are as follows:
The expected term of employee stock purchase plan ("ESPP") shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights during the three and nine months ended August 29, 2008 and August 31, 2007 are as follows:
Effective April 1, 2007, the government of India implemented a new fringe benefit tax that applies to equity awards granted to our employees in India. We incur a fringe benefit tax liability at the time the award is exercised or released. In accordance with the laws in India, we have elected to recover, from the employee, the fringe benefit tax paid in connection with the applicable award. Recovery of the fringe benefit tax from the employee is treated as a component of the exercise price and as such, impacts the fair value of the awards and the related stock-based compensation. We have elected to use a Black-Scholes option pricing model that incorporates a binomial options pricing model to calculate the fair value of stock-based awards issued in India under amended equity award agreements. The assumptions used in the valuation of equity awards in India are the same as those used for all of our equity awards as noted above. The recovery of fringe benefit tax is recorded as stock-based compensation cost in our consolidated statements of income.
Summary of Stock Options
Information regarding stock options outstanding at August 29, 2008 and August 31, 2007 is summarized below.
Summary of Restricted Stock Units
Restricted stock unit activity for the nine months ended August 29, 2008 and August 31, 2007 is as follows:
Information regarding restricted stock units outstanding at August 29, 2008 and August 31, 2007 is summarized below.
Summary of Performance Shares
Effective January 24, 2008, the Executive Compensation Committee adopted the 2008 Performance Share Program (the "2008 Program"). The purpose of the 2008 Program is to align key management and senior leadership with stockholders' interests and to retain key employees. The measurement period for the 2008 Program is our fiscal 2008 year. All members of our executive management and other key senior leaders are participating in the 2008 Program. Awards granted under the 2008 Program were granted in the form of performance shares pursuant to the terms of our 2003 Equity Incentive Plan. If pre-determined performance goals are met, shares of stock will be granted to the recipient, with 25% vesting on the later of the date of certification of achievement or the first anniversary date of the grant, and the remaining 75% vesting evenly on the following three annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe. Participants in the 2008 Program have the ability to receive up to 200% of the target number of shares originally granted.
The following table sets forth the summary of performance share activity under our 2008 Program for the nine months ended August 29, 2008.
In the first quarter of fiscal 2008, the Executive Compensation Committee certified the actual performance achievement of participants in the 2006 Performance Share Program (the "2006 Program") and the 2007 Performance Share Program (the "2007 Program"). Based upon the achievement of goals outlined in the 2006 Program and 2007 Program, participants had the ability to receive up to 150% and 200%, respectively, of the target number of shares originally granted. Actual performance resulted in participants achieving approximately 105% of target or 0.3 million shares for the 2006 Program and 200% of target or 0.7 million shares for the 2007 Program. Shares awarded under the 2006 Program vested 100% and were released in the first quarter of fiscal 2008. Shares under the 2007 Program vested 25% in the first quarter of fiscal 2008, and the remaining 75% vest evenly on the following three annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe.
The following table sets forth the summary of performance share activity under our 2007 Program, based upon share awards actually achieved, for the nine months ended August 29, 2008:
Compensation Costs
As of August 29, 2008, there was $301.8 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.7 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
Total stock-based compensation costs that have been included in our consolidated statements of income for the three months ended August 29, 2008 and August 31, 2007 are as follows:
Total stock-based compensation costs that have been included in our consolidated statements of income for the nine months ended August 29, 2008 and August 31, 2007 are as follows:
3.53.62.33.53.63.74.74.80.340.30.320.30.370.340.390.340.02790.04340.0170.04340.0350.05140.0350.05140.50.50.50.522220.340.30.30.30.360.310.360.330.02120.04870.02120.04790.02660.04930.03290.051128230001458000-3530000-146000-47000931000-740001863000-149000718000-205000-59000170100004025000141100042070000547440003993600051832000272520003425200029.6727.5929.2927.125.9422.95554500000830100000541200000811400000460300000678100000308300098100017240000060300000132000000420000000857000017140004540004.163.934.073.843.353.061.912.021.691.79118900014430002968000405900015612000166640004338200044192000105760001041400031701000310710006113000585700018841000189660003349000034378000968920009828800023000098000483000225000637700022300001638000059650005370000133000015558000395400027930006710001036800017640001477000043290004278900011908000NOTE 8. EMPLOYEE BENEFIT PLAN
Deferred Compensation Plan
As of August 29, 2008 and November 30, 2007, the invested amounts under our Deferred Compensation Plan totaled $9.2 million and $3.1 million, respectively, and are recorded as long-term other assets on our balance sheet. As of August 29, 2008 and November 30, 2007, we recorded $9.2 million and $3.1 million, respectively, as a long-term liability to recognize undistributed deferred compensation due to employees.NOTE 9. RESTRUCTURING AND OTHER CHARGES
Macromedia Merger Restructuring Charges
We completed our acquisition of Macromedia on December 3, 2005. We recognized costs related to the cancellation of certain contracts associated with the wind-down of subsidiaries and other service contracts held by Macromedia.
The following table sets forth a summary of Macromedia restructuring activities during the nine months ended August 29, 2008:
Included in the adjustments column is a change to previous estimates of sublease income of $2.6 million associated with closing redundant facilities as well as the effect of foreign currency changes. The change to previous estimates of sublease income was included in net income for the nine months ended August 29, 2008. Accrued restructuring charges of $15.0 million at August 29, 2008 included $6.9 million recorded in accrued restructuring, current and $8.1 million related to long-term facilities obligations recorded in accrued restructuring, non-current in the accompanying condensed consolidated balance sheets. We expect to pay these liabilities through fiscal 2011. At November 30, 2007, accrued restructuring charges of $17.7 million included $3.7 million recorded in accrued restructuring, current and $14.0 million related to long-term facilities obligations recorded in accrued restructuring, non-current in the accompanying condensed consolidated balance sheets.000026976000269760001396500016283000-5287000296900028248000422130000000323800032380009930001435000-131000-311000136300023560001495800017718000-541800026580005982500074783000NOTE 10. STOCKHOLDERS' EQUITY
Stock Repurchase Program I
To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we repurchase shares in the open market and also enter into structured repurchases with third parties.
During the nine months ended August 29, 2008 and August 31, 2007, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $325.0 million and $600.0 million, respectively. We entered into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price ("VWAP") of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.
The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount. During the nine months ended August 29, 2008, we repurchased 19.0 million shares at an average price of $37.12 through structured repurchase agreements which included prepayments from fiscal 2007. During the nine months ended August 31, 2007, we repurchased 15.4 million shares at an average price of $39.23 through structured repurchase agreements which included prepayments from fiscal 2006.
During the nine months ended August 29, 2008, we also repurchased 0.75 million shares at an average price of $39.19 in open market transactions.
As of August 29, 2008 and November 30, 2007, the prepayments were classified as treasury stock on our balance sheet at the payment date, though only shares physically delivered to us by August 29, 2008 and November 30, 2007 are excluded from the denominator in the computation of earnings per share. All outstanding structured repurchase agreements as of August 29, 2008 under this program expired on or before September 19, 2008. As of August 29, 2008 and August 31, 2007, approximately $41.0 million and $200.0 million, respectively, of up-front payments remained under the agreements.
Subsequent to August 29, 2008, we entered into additional structured stock repurchase agreements with large financial institutions whereupon we provided the financial institutions with prepayments of $200.0 million. This amount will be classified as treasury stock on our balance sheet.
Stock Repurchase Program II
Under this stock repurchase program, we had authorization to repurchase 50.0 million shares of our common stock. During the third quarter of fiscal 2008, the remaining authorized number of shares were repurchased. From the inception of the 50.0 million share authorization under this program, we provided prepayments of $1.9 billion under structured share repurchase agreements to large financial institutions. During the nine months ended August 29, 2008, we provided prepayments of $1.0 billion and repurchased 31.9 million shares under these structured agreements at an average price of $37.15. As of August 31, 2007, we had provided prepayments of $850.0 million and repurchased 12.9 million shares through structured share repurchase agreements at an average price of $39.94. Approximately $333.4 million of up-front payments remained as of August 31, 2007.
During the nine months ended August 29, 2008, we also repurchased 0.5 million shares at an average price of $39.79 in open market transactions.
NOTE 11. COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive income for the three and nine months ended August 29, 2008 and August 31, 2007:-1998000700000-110010005568000-635800021000-4284000174600010494000-377600010776000420002138000-3055000-45090007356000193746000202188000621388000508955000NOTE 12. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended August 29, 2008 and August 31, 2007:For the three and nine months ended August 29, 2008, options to purchase approximately 14.4 million and 15.4 million shares, respectively, of common stock with exercise prices greater than the average fair market value of our stock of $42.06 and $39.21, respectively, were not included in the calculation because the effect would have been anti-dilutive. Comparatively, for the three and nine months ended August 31, 2007, options to purchase approximately 11.9 million and 11.0 million shares, respectively, of common stock with exercise prices greater than the average fair market value of our stock of $41.26 and $40.93, respectively, were not included in the calculation because the effect would have been anti-dilutive.10630001100099100013000918800013653000912400015109000NOTE 13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We occupy three office buildings in San Jose, California where our corporate headquarters are located. We reference these office buildings as the Almaden Tower and the East and West Towers.
In August 2004, we extended the lease agreement for our East and West Towers for an additional five years with an option to extend for an additional five years solely at our election. In March 2007, the Almaden Tower lease was extended for five years, with a renewal option for an additional five years solely at our election. As part of the lease extensions, we purchased the lease receivable from the lessor of the East and West Towers for $126.8 million and a portion of the lease receivable from the lessor of the Almaden Tower for $80.4 million, both of which are recorded as investments in lease receivables on our consolidated balance sheet. This purchase may be credited against the residual value guarantee if we purchase the properties or will be repaid from the sale proceeds if the properties are sold to third parties. Under the agreement for the East and West Towers and the agreement for the Almaden Tower, we have the option to purchase the buildings at any time during the lease term for approximately $143.2 million and $103.6 million, respectively. The residual value guarantees under the East and West Towers and the Almaden Tower obligations are $126.8 million and $89.4 million, respectively.
These two leases are both subject to standard covenants including certain financial ratios that are reported to the lessors quarterly. As of August 29, 2008, we were in compliance with all covenants. In the case of a default, the lessor may demand we purchase the buildings for an amount equal to the lease balance, or require that we remarket or relinquish the buildings. Both leases qualify for operating lease accounting treatment under SFAS No. 13, "Accounting for Leases", and, as such, the buildings and the related obligations are not included on our consolidated balance sheet. We utilized this type of financing in order to access bank-provided funding at the most favorable rates and to provide the lowest total cost of occupancy for the headquarter buildings. At the end of the lease term, we can extend the lease for an additional five year term, purchase the buildings for the lease balance, remarket or relinquish the buildings. If we choose to remarket or are required to do so upon relinquishing the buildings, we are bound to arrange the sale of the buildings to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the residual value guarantee amount.
Contractual Commitments
As discussed in Note 4, during the third quarter of fiscal 2008, we entered into an agreement to license certain technology. This agreement also provides us the ability to acquire rights to intellectual property in the future. Minimum fees associated with this arrangement range between approximately $1.0 million and $1.5 million per year through May 2028 for minimum fees in the aggregate, of approximately $25.0 million.
Guarantees
The lease agreements for our corporate headquarters provide for residual value guarantees as noted above. Under FIN 45, the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002 must be recognized as a liability on our consolidated balance sheet. As such, we recognized $5.2 million and $3.0 million in liabilities, related to the East and West Towers and Almaden Tower leases, respectively. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statement over the life of the leases. As of August 29, 2008 and November 30, 2007, the unamortized portion of the fair value of the residual value guarantees, for both leases, remaining in other long-term liabilities and prepaid rent was $3.0 million and $4.2 million, respectively.
Royalties
We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue.
Indemnifications
In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
To the extent permitted under Delaware law, we have agreements whereby we indemnify our directors and officers for certain events or occurrences while the director or officer is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the director's or officer's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
As part of our limited partnership interest in Adobe Ventures, we have provided a general indemnification to Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on behalf of the partnership. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote.
Legal Proceedings
In connection with our anti-piracy efforts, conducted both internally and through organizations such as the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other local laws. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be affected in any particular period by the resolution of one or more of these counter-claims.
From time to time, Adobe is subject to legal proceedings, claims and investigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with GAAP, Adobe makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against Adobe. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.NOTE 14. CREDIT AGREEMENT
In August 2007, we entered into an Amendment to our Credit Agreement dated February 2007 (the "Amendment"), which increased the total senior unsecured revolving facility from $500.0 million to $1.0 billion. The Amendment also permits us to request one-year extensions effective on each anniversary of the closing date of the original agreement, subject to the majority consent of the lenders. We also retain an option to request an additional $500.0 million in commitments, for a maximum aggregate facility of $1.5 billion.
In February 2008, we entered into a Second Amendment to the Credit Agreement dated February 26, 2008, which extended the maturity date of the facility by one year to February 16, 2013. The facility would terminate at this date if no additional extensions have been requested and granted. All other terms and conditions remain the same.
The facility contains a financial covenant requiring us not to exceed a certain maximum leverage ratio. At the Company's option, borrowings under the facility accrue interest based on either the London interbank offered rate ("LIBOR") for one, two, three or six months, or longer periods with bank consent, plus a margin according to a pricing grid tied to this financial covenant, or a base rate. The margin is set at rates between 0.20% and 0.475%. Commitment fees are payable on the facility at rates between 0.05% and 0.15% per year based on the same pricing grid. The facility is available to provide loans to us and certain of our subsidiaries for general corporate purposes. During the nine months ended August 29, 2008, we borrowed $450.0 million and made repayments of $100.0 million under this facility. As of August 29, 2008 and November 30, 2007, the amount outstanding under the credit facility was $350.0 million and zero, respectively, which is included in long-term liabilities on our condensed consolidated balance sheet. As of August 29, 2008, we were in compliance with all of the covenants.NOTE 15. NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense) for the three and nine months ended August 29, 2008 and August 31, 2007 includes the following:14407000227800004511000071268000-596700099000-11901000-417200044000-249000-156000-26360008540001030001725000140600028610001980001829800093080002882000078400005091000-353000-624000-989000-1784000-3293000-268000-4814000-3546000NOTE 16. INDUSTRY SEGMENTS
We have the following segments: Creative Solutions, Knowledge Worker Solutions, Enterprise Solutions, Mobile and Device Solutions, Platform and Print Publishing. Our Creative Solutions segment focuses on delivering a complete professional line of integrated tools for a full range of creative and developer tasks to an extended set of customers. The Knowledge Worker Solutions segment focuses on the needs of knowledge worker customers, providing essential applications and services to help them share information and collaborate. This segment contains revenue generated by Acrobat Connect and our Acrobat family of products. Our Enterprise Solutions segment provides server-based enterprise interaction solutions that automate people-centric processes and contains revenue generated by our LiveCycle line of products. The Mobile and Device Solutions segment provides solutions that deliver compelling experiences through rich content, user interfaces and data services on mobile and non-PC devices such as cellular phones, consumer devices and Internet connected hand-held devices. The Platform segment provides developer solutions and technologies, including Adobe Flash Player, Adobe AIR and Flex Builder which are used to build rich application experiences. Finally, the Print Publishing segment addresses market opportunities ranging from the diverse publishing needs of technical and business publishing, to our legacy type and original equipment manufacturer ("OEM") printing businesses.Effective in the first quarter of fiscal 2008, to better align our engineering and marketing efforts, we merged our Knowledge Worker Solutions segment with our Enterprise Solutions segment (formerly "Enterprise and Developer Solutions") to form our new Business Productivity Solutions business unit. However, under the requirements of SFAS No. 131, ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information", Knowledge Worker Solutions and Enterprise Solutions are separate reportable segments. In addition, we moved responsibility for Flex Builder, Flex SDK and our ColdFusion product line to our Platform segment from our Enterprise Solutions segment. The prior year information in the table below has also been updated to reflect this product movement.
Our chief operating decision maker reviews revenue and gross margin information for each of our operating segments. Operating expenses are not reviewed on a segment by segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the operating segments.
5371600040114000124024000103023000439899000505339000144031100012254400000.890.930.920.92157620001596900039476000474730002022260001607950005724490004889090000.930.910.940.91207270001823800056308000532370004476400032390000117703000838070000.680.640.680.6167440009521000195250002320600020751000346200045394000157930000.750.270.700.4073930003240000158210009846000241890001545300074296000435130000.770.830.820.8265090005539000210380001931300044577000416260001382430001331100000.870.880.870.870.880.890.900.89NOTE 17. SUBSEQUENT EVENTS
Stock Repurchase Programs
Subsequent to August 29, 2008, as part of Stock Repurchase Program I, we entered into additional structured stock repurchase agreements with large financial institutions whereupon we provided the financial institutions with prepayments of $200.0 million. This amount will be classified as treasury stock on our balance sheet. See Note 10 for further discussion of our stock repurchase programs.ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion (unaudited and presented in millions, except share and per share amounts) should be read in conjunction with the condensed consolidated financial statements and notes thereto.
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding product plans, future growth and market opportunities, which involve risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" in Part II, Item 1A. You should carefully review the risks described herein and in other documents we file from time to time with the SEC, including the Annual Report on Form 10-K for fiscal 2007 and the other Quarterly Reports on Form 10-Q filed by us in fiscal 2008. When used in this report, the words "expects", "could", "would", "may", "anticipates", "intends", "plans", "believes", "seeks", "targets", "estimates", "looks for", "looks to" and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.Founded in 1982, Adobe Systems Incorporated is one of the largest and most diversified software companies in the world. We offer a line of creative, business and mobile software and services used by creative professionals, designers, knowledge workers, high-end consumers, OEM partners, developers and enterprises for creating, managing, delivering and engaging with compelling content and experiences across multiple operating systems, devices and media. We distribute our products through a network of distributors and dealers, value-added resellers ("VARs"), systems integrators, independent software vendors ("ISVs") and OEMs, direct to end users and through our Web site at www.adobe.com. We also license our technology to hardware manufacturers, software developers and service providers, and we offer integrated software solutions to businesses of all sizes. We have operations in the Americas, Europe, the Middle East and Africa ("EMEA") and Asia. Our software runs on personal computers with Microsoft Windows, Apple OS, Linux, UNIX and various non-PC platforms, depending on the product.
We maintain executive offices and principal facilities at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000. We maintain a Web site at www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC Web site at www.sec.gov.Effective in the first quarter of fiscal 2008, to better align our engineering and marketing efforts, we merged our Knowledge Worker Solutions segment with our Enterprise Solutions segment to form our new Business Productivity Solutions business unit. However, under the requirements of SFAS 131, Knowledge Worker Solutions and Enterprise Solutions are separate reportable segments. In addition, we moved responsibility for Flex Builder, Flex SDK and our ColdFusion product line to our Platform segment from our Enterprise Solutions segment. The prior year information has been updated to reflect this product movement.
During the third quarter of fiscal 2008, we continued to focus on driving revenue growth and increasing market share of our products through the continued delivery of comprehensive software and technology solutions that meet the evolving needs of our customers.
In our Knowledge Worker Solutions segment, we achieved a fourth consecutive quarter of record revenue with our Acrobat family of products in the third quarter of fiscal 2008. Helping drive this achievement was the successful launch of version 9 of our Acrobat family of products in major languages across the world.
In our Enterprise Solutions segment, we also achieved record revenue and 29% year-over-year growth as we continued to focus on delivering innovative products and solutions for our enterprise customers.
In our Creative Solutions segment, revenue declined year-over-year due to the timing of the release of new product versions. In the third quarter of fiscal 2007, we completed the release of many new versions of our Creative Suite 3 ("CS3") family of products. In the third quarter of fiscal 2008, we began preparing for the next launch of our creative professional products, including the pre-release of newer versions of some of these products. We achieved solid results with our hobbyist products, Photoshop Elements and Premiere Elements, and we also had strong results with our Scene7 business in the third quarter of fiscal 2008.
Our Mobile and Device Solutions segment achieved record revenue in the third quarter of fiscal 2008 due to the success we have had targeting mobile operators, handset manufacturers and consumer electronic device manufactures with our Flash Lite and Flash Cast technologies. On May 1, 2008, we announced the Open Screen Project. The project aims to enable a consistent runtime environment that will remove barriers for developers and designers as they publish content and applications across desktops and consumer devices, including phones, mobile internet devices ("MIDs") and set top boxes. As part of the project, we will be removing some restrictions on the use of some of our technology specifications and publishing several technology protocols. We will also be removing the license fees on the next major releases of Adobe Flash Player and Adobe AIR for devices. Accordingly, we expect revenue from Mobile and Device Solutions to decrease in the fourth quarter of fiscal 2008 as well as to continue to decrease following the next major release of these products scheduled for fiscal 2009. We would expect this decrease to be offset in time by an increased demand for tooling products, server technologies, hosted services and applications.
Our Platform business performed strongly, resulting in significant year-over-year revenue growth and our Print Publishing business segment also achieved modest year-over-year revenue growth.In preparing our condensed consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.
We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, stock-based compensation, goodwill impairment and income taxes have the greatest potential impact on our condensed consolidated financial statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.
With the exception of our adoption of FIN 48, there have been no other significant changes in our critical accounting policies and estimates during the nine months ended August 29, 2008 as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended November 30, 2007.As described in Note 16 of our Notes to Condensed Consolidated Financial Statements, we have the following segments: Creative Solutions, Knowledge Worker Solutions, Enterprise Solutions, Mobile and Device Solutions, Platform and Print Publishing products.
Our services and support revenue is comprised of consulting, training, and maintenance and support, primarily related to the licensing of our enterprise, developer and platform products. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. Our maintenance and support offerings which entitle customers to receive product upgrades and enhancements or technical support, depending on the offering, are recognized ratably over the term of the arrangement.0.950.960.950.960.030.180.050.040.050.040.260.330.040.19Revenue from Creative Solutions decreased $51.9 million during the three months ended August 29, 2008 as compared to the three months ended August 31, 2007. This decrease was driven largely by a 15% decline in Creative Suites related revenue, offset in part by an increase of approximately 10% in Photoshop revenue. Revenue from Creative Solutions increased $235.8 million during the nine months ended August 29, 2008 as compared to the nine months ended August 31, 2007. This increase resulted from a 15% increase in Creative Suites revenue and a 23% increase in Photoshop revenue.
The year-over-year decrease in Creative Solutions revenue in the third quarter of fiscal 2008 was due primarily to the timing of the release of new product versions. The year-over-year increase in Creative Solutions revenue during the first three quarters of fiscal 2008 was due to an increase in certain unit average selling prices offset by a slight decrease in the number of units sold as compared to the first three quarters of fiscal 2007.
Revenue from Knowledge Worker Solutions increased $41.2 million and $75.5 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007, primarily due to the successful launch of our Acrobat 9 family of products in the third quarter of fiscal 2008. Additionally, revenue increased due to an increase in volume licensing by enterprise customers as well as increases in certain unit average selling prices and in the number of units sold for the three and nine months ended August 29, 2008 as compared to the three and nine months ended August 31, 2007.
Revenue from Enterprise Solutions increased $14.9 million and $37.0 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase was primarily due to a larger number of enterprise solution transactions at a higher average transaction size during both the three and nine months ended August 29, 2008 compared with the corresponding periods is in the prior fiscal year.
Revenue from Mobile and Device Solutions increased $14.5 million and $25.9 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase was primarily due to increased revenue from Flash Lite OEM licensing due to continued strong adoption of Flash enabled devices. On May 1, 2008, we announced the Open Screen Project. The project aims to enable a consistent runtime environment that will remove barriers for developers and designers as they publish content and applications across desktops and consumer devices, including phones, MIDs and set top boxes. As part of the project, we will be removing some restrictions on the use of some of our technology specifications and publishing several technology protocols. We will also be removing the license fees on the next major releases of Adobe Flash Player and Adobe AIR for devices. Accordingly, we expect revenue from Mobile and Device Solutions to decrease in the fourth quarter of fiscal 2008 as well as to continue to decrease following the next major release of these products scheduled for fiscal 2009. We would expect this decrease to be offset in time by an increased demand for tooling products, server technologies, services and applications.
Revenue from Platform increased $12.9 million and $36.7 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase was primarily due to increased revenue from our Flex Builder, Flash Player and ColdFusion products.
Revenue from Print Publishing increased $4.0 million and $7.0 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase resulted principally from a slight increase in revenue associated with our legacy products.
493600000545500000156430000013285000000.560.640.590.59-0.10.182180000001768000006119000005364000000.250.210.230.240.230.1465500000506000001741000001371000000.070.060.070.060.290.27275000001300000064900000390000000.030.010.020.021.120.66316000001870000090100000534000000.030.020.030.020.690.6951100000471000001593000001523000000.060.060.060.070.080.05Overall revenue for the three and nine months ended August 29, 2008 increased when compared to the three and nine months ended August 31, 2007 primarily due to continued adoption of our CS3 and LiveCycle families of products and continued licensing of our Acrobat family of products - including the launch of our new Acrobat 9 products in the third quarter of fiscal 2008. Licensing of our Mobile and Device products and Platform products also contributed to the increase. Revenue in the Americas increased $28.9 million and $127.8 million during the three and nine months ended August 29, 2008, compared to the three months and nine months ended August 31, 2007, due to solid demand, as well as strong licensing of our products in the education market and the Acrobat 9 product launch in the third quarter of fiscal 2008.
Revenue in EMEA increased $14.5 million and $206.4 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. Additionally, revenue in EMEA measured in U.S. dollars increased approximately $28.7 million and $83.2 million during the three and nine months ended August 29, 2008, respectively, over the same reporting periods last year. Fluctuations in EMEA revenue during the three and nine months ended August 29, 2008 as compared to the same periods in fiscal 2007, were primarily attributable to favorable foreign exchange, a decline in CS revenue due primarily to the timing of the release of new product versions with our CS family of products and normal seasonal weakness in Europe during the third quarter of fiscal 2008.
Revenue in Asia decreased $7.8 million during the three months ended August 29, 2008 compared to the three months ended August 31, 2007, due primarily to the timing of the release of new product versions with our CS family of products and, to a lesser extent, normal seasonal weakness in Asia during the third quarter of fiscal 2008. Revenue in Asia increased $83.7 million during the nine months ended August 29, 2008 compared to the nine months ended August 31, 2007. The increase primarily resulted from licensing of our CS family of products, our LiveCycle products, and our Platform products. Additionally, revenue in Asia measured in U.S. dollars increased approximately $10.1 million and $32.0 million during the three and nine months ended August 29, 2008, respectively, over the same reporting periods last year.429600000400700000121030000010825000000.490.470.460.480.070.122960000002815000009145000007081000000.330.330.340.320.050.291617000001695000005398000004561000000.180.20.20.2-0.050.18With regard to our product backlog, the actual amount of backlog at any particular time may not be a meaningful indicator of future business prospects. Backlog is comprised of unfulfilled orders, excluding those associated with new product releases, those pending credit review and those not shipped due to the application of our global inventory policy. We had minimal backlog at the end of the third quarter of fiscal 2008. The comparable backlog at the end of the second quarter of fiscal 2008 was approximately 4% of second quarter fiscal 2008 revenue.0.100.080.080.090.230.050.030.030.030.030.110.170.20.08Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization related to localization costs and acquired rights to use technology and the costs associated with the manufacturing of our products.
Cost of product revenue increased (decreased) due to the following:
Amortization of acquired rights to use technology increased primarily due to the fact that we entered into certain technology licensing arrangements totaling $100.0 million during the third quarter of fiscal 2008. An estimated $56.0 million of this cost is related to future licensing rights and has been capitalized and will be amortized on a straight-line basis over the estimated useful lives up to nine years. Of the remaining costs, we estimated that approximately $27.2 million was related to historical use of licensing rights which was expensed as cost of sales, and the residual of $16.8 million was expensed as general and administrative costs. In connection with these licensing arrangements, we have the ability to acquire additional rights to use technology in the future. See Note 13 of our Notes to Condensed Consolidated Financial Statements for further information regarding our contractual commitments.
Amortization expense decreased during the three and nine months ended August 29, 2008 as compared to the three and nine months ended August 31, 2007, due to a decrease in amortization expense primarily associated with intangible assets purchased through the Macromedia acquisition.
Localization costs which are amortized over the product life cycle, decreased during the three months ended August 29, 2008 as compared to the three months ended August 31, 2007, primarily due to increased localization costs in the third quarter of fiscal 2007 associated with the release of the localized versions of our CS3 family of products.
-0.140.020.420.080.020.04-0.1-0.10.030.010.230.05Cost of services and support revenue is primarily comprised of employee-related costs and associated costs incurred to provide consulting services, training and product support.
Cost of services and support revenue increased during the three and nine months ended August 29, 2008 as compared to the three and nine months ended August 31, 2007, primarily due to increases in compensation and related benefits driven by increases in headcount related to product support and utilization by customers of our consulting services.
Research and Development, Sales and Marketing and General and Administrative Expenses
The increase in compensation costs for the three months ended August 29, 2008 is due to increased headcount in all functions. This increase is offset in part by a decrease in profit sharing and employee bonuses based on company performance to date, when compared to the three months ended August 31, 2007.
The increase in compensation costs for the nine months ended August 29, 2008 related to increases in headcount and stock-based compensation offset by decreases in profit sharing and employee bonuses based on company performance to date, when compared to the nine months ended August 31, 2007.
Research and development expenses consist primarily of salary and benefit expenses for software developers, contracted development efforts, related facilities costs and expenses associated with computer equipment used in software development.
Research and development expenses increased (decreased) due to the following:
We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced products. We will continue to focus on long-term opportunities available in our end markets and make significant investments in the development of our desktop application and server-based software products.0.190.190.190.20.040.130.060.08-0.020.0400.010.040.13Sales and marketing expenses consist primarily of salary and benefit expenses, sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs.
Sales and marketing expenses increased (decreased) due to the following:
0.080.160.310.290.310.31-0.010.050.050.050.030.050.010.010.080.16General and administrative expenses consist primarily of compensation and benefit expenses, travel expenses and related facilities costs for our finance, facilities, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, expenses associated with computer equipment and software used in the administration of the business, charitable contributions and various forms of insurance.
General and administrative expenses increased (decreased) due to the following:
Allocation of costs associated with acquired rights to use technology increased primarily due to the fact that we entered into certain technology licensing arrangements totaling $100.0 million during the third quarter of fiscal 2008. An estimated $56.0 million of this cost is related to future licensing rights and has been capitalized and will be amortized on a straight-line basis over the estimated useful lives up to nine years. Of the remaining costs, we estimated that approximately $27.2 million was related to historical use of licensing rights which was expensed as cost of sales, and the residual of $16.8 million was expensed as general and administrative costs. In connection with these licensing arrangements, we have the ability to acquire additional rights to use technology in the future. See Note 13 of our Notes to Condensed Consolidated Financial Statements for further information regarding our contractual commitments. 0.370.280.110.080.10.09-0.010.060.240.080.050.050.040.020.050.070.370.28During the nine months ended August 29, 2008, there was an adjustment to previous estimates associated with closing redundant Macromedia facilities that were acquired through the acquisition. As of August 29, 2008, accrued restructuring charges related to the Macromedia acquisition totaled $15.0 million. We expect to pay this liability through fiscal 2011.13.330000Amortization expense decreased during the three and nine months ended August 29, 2008 as compared to the three and nine months ended August 31, 2007, due to a decrease in amortization expense associated with intangible assets purchased through the Macromedia acquisition. Additionally, included in the amortization of purchased intangibles and incomplete technology for the nine months ended August 31, 2007 was $1.5 million related to the write-off of in-process research and development from an acquisition that occurred during the second quarter of fiscal 2007.-0.05-0.060.020.020.020.02The largest component of interest and other income, net, was interest earned on cash, cash equivalents and short-term fixed income investments. Interest and other income, net also included foreign exchange gains and losses, including those from hedging revenue transactions primarily denominated in Japanese Yen and Euro currencies.
Interest and other income, net, decreased during the three and nine months ended August 29, 2008 as compared to the three and nine months ended August 31, 2007 primarily as a result of lower average invested balances due to cash used for our share repurchase programs and lower interest rates. Additionally, during the nine months ended August 29, 2008, interest and other income, net included gains and losses on the sale or write-down for other-than-temporary impairment of fixed income investments.
Interest expense for the three and nine months ended August 29, 2008, primarily represents interest associated with our credit facility. The outstanding balance as of August 29, 2008 was $350.0 million. Interest due under the credit facility is paid upon expiration of the LIBOR contract or at a minimum, quarterly.Investment gains, net, consist principally of realized gains or losses from the sale of marketable equity investments, other-than-temporary declines in the value of marketable and non-marketable equity securities and gains and losses of Adobe Ventures. In the three and nine months ended August 29, 2008, investment gains, net, increased as compared to the three and nine months ended August 31, 2007 due primarily to gains from a direct investment. Additionally, during the nine months ended August 29, 2008, we received cash and recognized a gain resulting from the expiration of the escrow period related to the sale of our investment in Atom Entertainment, Inc. that occurred during the fourth quarter of fiscal 2006.-0.59-0.470.010.030.010.03000000-41.23000.010-0.59-0.37Our effective tax rate decreased approximately 10% and 2% during the three and nine months, respectively, ended August 29, 2008 as compared to the three and nine months ended August 31, 2007. The decrease was primarily related to the completion in the third quarter of fiscal 2008 of a U.S. income tax examination covering our fiscal years 2001 through 2004, and to a lesser extent, stronger forecasted international profits for fiscal 2008 and lower foreign taxes on those forecasted profits.-0.490.140.040.080.070.070.160.260.220.242000900000199390000018555000001720400000This data should be read in conjunction with the consolidated statements of cash flows.
Our primary source of cash is receipts from revenue. The primary uses of cash are payroll related expenses; general operating expenses including marketing, travel and office rent; and cost of product revenue. Another source of cash is proceeds from the exercise of employee options and participation in the ESPP and another use of cash is our stock repurchase program, which is detailed below.Net cash provided by operating activities of $942.9 million for the nine months ended August 29, 2008, was primarily comprised of net income plus the net effect of non-cash expenses. The primary working capital sources of cash were increases in net income and deferred revenue. Increases in deferred revenue related to maintenance and support from increased upgrade plans purchased were offset in part by decreases in deferred revenue related to royalties.
The primary working capital uses of cash were increases in receivables, prepaid expenses and other current assets coupled with decreases in income taxes payable, accrued expenses, trade payables and accrued restructuring costs. Accounts receivable increased primarily as a result of the timing of shipments during the third quarter of fiscal 2008 compared to the same reporting period in fiscal 2007. Income taxes payable decreased primarily due to payments made as the result of the completion of a U.S. income tax examination covering our fiscal years 2001 through 2004. Accrued expenses decreased primarily due to payments for employee bonuses, profit sharing and an increase in employee stock purchases offset in part by increases in royalty accruals. Accrued restructuring costs decreased primarily due to payments of facility costs during the nine months ended August 29, 2008.
Net cash used for investing activities decreased from cash used for the nine months ended August 31, 2007 of $213.3 million to cash used in the nine months ended August 29, 2008 of $5.5 million. Uses of cash during the nine months ended August 29, 2008 primarily represented purchases of short-term investments, property and equipment and long-term investments and other assets. The uses associated with the purchase of long-term investments and other assets related primarily to cash paid for future licensing rights acquired through certain technology licensing arrangements totaling $56.0 million. As part of our lease extension for the Almaden Tower lease completed during the second quarter of fiscal 2007, we purchased a portion of the lease receivable totaling $80.4 million. We also completed two acquisitions for cash consideration of approximately $70.0 million during fiscal 2007.
These uses of cash were offset in part by maturities and sales of short-term investments and to a lesser extent, proceeds from the sale of equity securities.
Net cash used for financing activities decreased $294.9 million for a total of $747.7 million in the nine months ended August 29, 2008 as compared to cash used for the same period last year, primarily due to lower purchases of treasury stock when compared to the prior year (see sections entitled "Stock Repurchase Program I" and "Stock Repurchase Program II" discussed below), offset in part by proceeds related to the issuance of the treasury stock. Sources of cash during the nine months ended August 29, 2008 also included $450.0 million of proceeds from borrowings under our credit facility offset in part by repayments of $100.0 million on this credit facility.
We expect to continue our investing activities, including short-term and long-term investments and purchases of computer systems for research and development, sales and marketing, product support and administrative staff. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase programs and to strategically acquire software companies, products or technologies that are complementary to our business. The Board of Directors has approved a facilities expansion for our operations in India, which may include the purchase of land and buildings. As previously disclosed, we plan to invest $100.0 million directly in venture capital, of which, approximately $27.5 million has already been spent. The remaining balance will be invested over the next three to five years.
Our existing cash, cash equivalents and investment balances may decline during the fourth quarter of fiscal 2008 and into fiscal 2009 in the event of a further weakening of the economy or changes in our planned cash outlay. However, based on our current business plan and revenue prospects, we believe that our existing balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part II, Item 1A titled "Risk Factors". During the third quarter of fiscal 2007, we also increased our existing $500.0 million credit facility to $1.0 billion. The purpose of the credit facility is to provide backup liquidity for general corporate purposes including stock repurchases. In January 2008, we drew down $450.0 million under this facility, of which $350.0 million was outstanding as of August 29, 2008 and is included in long-term liabilities on our condensed consolidated balance sheet.
We use professional investment management firms to manage a large portion of our invested cash. External investment firms managed, on average, 43% of our consolidated invested balances during the third quarter of fiscal 2008. Within the U.S., the portfolio is invested primarily in money market funds for working capital purposes. Outside of the U.S., our fixed income portfolio is primarily invested in U.S. Treasury securities. All investments are made according to policies approved by the Board of Directors.
Stock Repurchase Program I To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we repurchase shares in the open market and also enter into structured repurchases with third parties.
During the nine months ended August 29, 2008, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $325.0 million. We entered into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price ("VWAP") of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.
The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval, and the average VWAP of our stock during the interval less the agreed upon discount.
The prepayments were classified as treasury stock on our balance sheet at the payment date, though only shares physically delivered to us by August 29, 2008 are excluded from the denominator in the computation of earnings per share. All outstanding structured repurchase agreements as of August 29, 2008 under this program will expire on or before September 19, 2008. As of August 29, 2008 approximately $41.0 million of up-front payments remained under the agreements. During the nine months ended August 29, 2008, we repurchased 19.0 million shares at an average price per share of $37.12 through structured repurchase agreements which included prepayments from fiscal 2007.
During the nine months ended August 29, 2008, we also repurchased 0.75 million shares at an average price of $39.19 in open market transactions.
Subsequent to August 29, 2008, we entered into additional structured stock repurchase agreements with large financial institutions whereupon we provided the financial institutions with prepayments of $200.0 million. This amount will be classified as treasury stock on our balance sheet. See Notes 10 and 17 of our Notes to Condensed Consolidated Financial Statements for further discussion of our stock repurchase programs.
Stock Repurchase Program II Under this stock repurchase program, we had authorization to repurchase 50.0 million shares of our common stock. During the third quarter of fiscal 2008, the remaining authorized number of shares were repurchased. From the inception of the 50.0 million share authorization under this program, we provided prepayments of $1.9 billion under structured share repurchase agreements to large financial institutions. During the nine months ended August 29, 2008, we provided prepayments of $1.0 billion and repurchased 31.9 million shares under these structured agreements at an average price of $37.15. As of August 31, 2007, we had provided prepayments of $850.0 million and repurchased 12.9 million shares through structured share repurchase agreements at the average price of $39.94. Approximately $333.4 million of up-front payments remained as of August 31, 2007.
During the nine months ended August 29, 2008, we also repurchased 0.5 million shares at an average price of $39.79 in open market transactions.
Refer to Part II, Item 2 in this report for share repurchases during the quarter ended August 29, 2008
Our principal commitments as of August 29, 2008 consist of obligations under operating leases, royalty agreements and various service agreements. See Note 13 of our Notes to Condensed Consolidated Financial Statements for more detailed information.With the exception of our adoption of FIN 48, borrowings under our credit facility and entering into a certain technology license arrangement, there have been no other significant changes in our contractual commitments during the nine months ended August 29, 2008 as compared to the contractual commitments disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended November 30, 2007.
As of August 29, 2008, the principal outstanding under the credit facility was $350.0 million which is due in full no later than February 16, 2013. Interest associated with this facility cannot be estimated with certainty by period throughout the term since it is based on a fluctuating interest rate calculation.
As a result of adopting FIN 48, we reclassified $197.7 million from current income taxes payable to long-term income taxes payable related to unrecognized tax benefits.
The gross liability for unrecognized tax benefits at August 29, 2008 was $155.8 million, exclusive of interest and penalties. The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues with the IRS and other examinations could be resolved within the next 12 months, based upon the current facts and circumstances, we cannot estimate the timing of such resolution or range of potential changes as it relates to the unrecognized tax benefits that are recorded as part of our financial statements.
As discussed in Note 4 of our Notes to Condensed Consolidated Financial Statements, during the third quarter of fiscal 2008, we entered into an agreement to license certain technology. This agreement also provides us the ability to acquire rights to intellectual property in the future. Minimum fees associated with this arrangement range between approximately $1.0 million and $1.5 million per year through May 2028 for minimum fees in the aggregate, of approximately $25.0 million.
Two of our lease agreements discussed in Note 13 of our Notes to Condensed Consolidated Financial Statements are subject to standard financial covenants. As of August 29, 2008, we were in compliance with all of our financial covenants and we expect to remain in compliance during the next 12 months. We believe these limitations will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan.We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue.The lease agreements for our corporate headquarters provide for residual value guarantees. Under FIN 45, the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002 must be recognized as a liability on our consolidated balance sheet. As such, we recognized $5.2 million and $3.0 million in liabilities, related to the East and West Towers and Almaden Tower leases, respectively. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statement over the life of the leases. As of August 29, 2008, the unamortized portion of the fair value of the residual value guarantees remaining in other long-term liabilities and prepaid rent was $3.0 million.In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
To the extent permitted under Delaware law, we have agreements whereby we indemnify our directors and officers for certain events or occurrences while the director or officer is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the director's or officer's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
As part of our limited partnership interest in Adobe Ventures, we have provided a general indemnification to Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on behalf of the partnership. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote.
Included in cash and cash equivalents on our condensed consolidated balance sheet.Included in cash and cash equivalents on our condensed consolidated balance sheet.Included in either cash and cash equivalents or short-term investments on our condensed consolidated balance sheet.Included in short-term investments on our condensed consolidated balance sheet.Included in other assets on our condensed consolidated balance sheet.Included in prepaid expenses and other assets on our condensed consolidated balance sheet.Included in accrued expenses on our condensed consolidated balance sheet.For the three months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the nine months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the three months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the nine months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the three months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the nine months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the three months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the nine months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the three months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the nine months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the three months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the nine months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the three months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the nine months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the three months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the nine months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the three months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the nine months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the three months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.For the nine months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 29, 2008 and August 31, 2007 were $42.83 and $42.75, respectively.The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 29, 2008 and August 31, 2007 were $42.83 and $42.75, respectively.The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 29, 2008 and August 31, 2007 were $42.83 and $42.75, respectively.The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 29, 2008 and August 31, 2007 were $42.83 and $42.75, respectively.The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 29, 2008 and August 31, 2007 were $42.83 and $42.75, respectively.The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 29, 2008 and August 31, 2007 were $42.83 and $42.75, respectively.The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 29, 2008 and August 31, 2007 were $42.83 and $42.75, respectively.The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 29, 2008 and August 31, 2007 were $42.83 and $42.75, respectively.The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 29, 2008 and August 31, 2007 were $42.83 and $42.75, respectively.The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 29, 2008 and August 31, 2007 were $42.83 and $42.75, respectively.